OPINION | China’s Yuan in IMF: A Boon or a Bane?

When the world
still anticipates the decline of China faced by a new normal in economic growth
concomitant with decades of debates over China’s ‘Yuan’ to be included in the
elite basket of currencies, the International Monetary Fund’s (IMF) acceptance
of Yuan to its reserve currency basket clarifies China’s emergence in the
global economic power club.

Given China’s reform over the decades and its
greater export-led economy and robust growth, on November 30, IMF
granted yuan/renminbi with the prestigious designation of ‘Special Drawing
Rights’ (SDR)- finally imparting global importance to renminbi to the stature
of US dollar, Euro, British pound and Japanese yen.

But this
esteemed recognition by the West-led IMF of the reforms made by China in terms
its monetary and financial system, did come to China’s reputation basket with a
recurring cost. That is, following the challenges faced to enter the World
Trade Organisation in 2001 to that of finally becoming party to the IMF, China
had to loosen its grip over the tightly controlled renminbi in order to meet
the interests of the elite current basket. China acted aggressive in expanding
yuan’s global clout by building trade hubs in Europe to that of developing a
raft of renminbi-denominated bonds and commodity contracts. Of which, the most
striking step taken by China was the abrupt devaluation of the renminbi by
allowing the market forces to play a greater role- which created a volatility
in China’s domestic economy as well as impacted the global market at large. In
this view, Yuan’s entry in the elite basket came at the cost its devaluation-
which is now considered as safe, reliable and freely usable global currency.

With this
break of the IMF protocol on China’s inclusive currency, the central query lies
in the understanding of ‘who needs whom more’- does the dragon need IMF more or
vice-versa. Though on the surface, it broadly appears that China is more
benefitted by getting accession into the IMF currency basket but there also
appears an alternate perspective. Given the global economic influx, China’s
economic stability has become a global need. It can be said so, as China’s
economic growth and stability is deeply intertwined with that of global
economic stability. Although US dollar still looms large in finance and trade,
Chinese yuan has taken precedence over euro- making it a significant player in
international finance. In this perspective, IMF’s decision to accommodate yuan
in the economic power club is a strategic political decision. This can be
strongly argued as after coming into effect in September 2016, renminbi will
become one of the currencies to be used in the disbursement and repayment of
international bailouts denominated in the fund’s accounting unit. China will be
one of the prime actors to share the economic burden and safeguard the global
financial stability. Given this accession, there remains no doubt that China
which is often touted as an emerging economy has now emerged and is a
significant player in the international monetary system as well as global
economy. This also clarifies and dispels the ‘china threat syndrome’ as china
with its economic rise has rather become a stakeholder in the international
system. In this view, China’s greater role will also elevate China’s role as a
responsible actor in the international stage.

Having said
so, though addition of Yuan in IMF gives a significant impetus to China’s
economic boost and an opportunity to expand its economic muscle against the US
dollar. It is representative of China’s victory, which symbolises China’s
ascendance and acceptance as a important global player. In addition, Zimbabwe's
recent adoption of yuan as its legal
tender further paved the way for internationalization of yuan. Besides,
this elite recognition also invites certain challenges for China which will
test its role as a responsible player. Of which, the most notable is that of
maintaining its credibility by acting more transparent. Here, the most pressing
issues will revolve around countries which are accused of human rights abuses
and other violations. For instance, North Korea and Sudan, which are close
financial partners of China and which carries out transactions in renminbi will
now become an imminent challenge for China. As yuan now offers such countries
to circumvent the western sanctions and get access to global financial system.
Such complexities will impede China’s actions which itself now faces a limited
set of choices. There is now a credibility cost that will incur if China takes
a different path from the institutionalized normative structure.

In this gamut
of global interests, it becomes pertinent to assess what China’s Yuan addition
to IMF’s SDR mean for India. Broadly, it can be argued that Yuan in IMF
provides an economic opportunity for India. First, one of the direct impacts
will be felt in the trade relations between India and China. China is India’s
largest trading partner, wherein the increasing trade volume is compounded by a
widening gap of export-import, causing India to suffer the burden of trade
imbalance. Here, the causal factor has been China’s depreciation of yuan
resulting into over capacity of Indian market with Chinese goods compared to
India’s imports. With Yuan in the SDR basket, China’s manipulation of currency
will be restricted and thus, India can benefit from a standard currency value.
This can help to reduce the trade imbalance, which significantly impacts
India’s economic interests. Secondly, India’s over dependence on US dollar will
get impacted. For India heavily depends on US interest calculus for its
monetary policy. In this view, against the monopoly of US dollar, China’s Yuan
will provide an alternative to India’s monetary choice- diversifying India’s
economic policy. Thirdly, Yuan in SDR will also provide an opportunity to shift
the dependence on Bretton Woods institutions to that of BRICS Bank as an
alternative for seeking loans and other financial transactions. Thereby,
holistically China’s Yuan in IMF acts as a boon for India in many significant
ways.

With this
dynamic systemic change, the query lies in whether China has become a normative
actor in the international domain or will China by its ascendancy into the
normative structure will change the rules of the international system. It is
therefore, a crucial test of time to explore whether China will apply its logic
of ‘socialism with Chinese Characteristics’ in changing the rules. Thus, the
glass still remains half empty.

About The Author:

Amrita Jash(K-5665-2015) is Editor-in-Chief of IndraStra Global and is a Doctoral Scholar at the Centre for East Asian Studies (Chinese Division), School of
International Studies, Jawaharlal Nehru University, New Delhi, INDIA